Stuck on this ACC 2020 question Question 8 Arquitectos Interiores of Juarez, Mex

Question

Stuck on this ACC 2020 question

Question 8 Arquitectos Interiores of Juarez, Mexico, is contemplating a major change in its cost structure. Currently, a of its drafting work is performed by skilled draftsmen. Alfonso Jiminez, is considering replacing the draftsmen with a computerized drafting system. However, before making the change, Alfonso would like to Arquitectos' owner, know the consequences of the change, since the volume of business varies significantly from year to year. Shown below are CVP income statements for each alternative Manual Computerized System System $1,673,000 Sales $1,673,000 1,338,400 669,200 Variable costs Contribution margin 334,600 1,003,800 95,600 764,800 Fixed costs Net income $239,000 $239,000 (a) Determine the degree of operating leverage for each alternative. (Round answers to 2 decimal places, e.g. 1.25.) Degree of Operating Leverage Manual System Computerized System

Explanation / Answer

Degree of Operating Leverage = Contribution Margin /Operating Income or Sales - VAriaable cost/sales-variable cost-fixed cost.

MAnual System

Degree of Operating Leverage = 334600/239000 = 1.40

Computerised System

Degree of Operating Leverage = 1003800/239000 = 4.20

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